When it comes to investing for passive income through dividends and returns, choosing the right stock can make all the difference. In this article, we’ll compare two prominent Canadian stocks, Enbridge (TSX: ENB) and Fortis (TSX: FTS), to help investors make an informed decision on where to park their capital.
Enbridge stock: An energy giant
Enbridge stock, a North American midstream operator, is a heavyweight in the energy sector. With a robust focus on oil pipelines and a utility-like earnings profile, it offers a unique proposition for income-seeking investors.
The company’s most critical asset, the Mainline system, controls over 70% of Canada’s takeaway capacity, providing stability in the face of fluctuations in U.S. light oil production. Additionally, over 80% of Enbridge stock’s earnings before interest, taxes, depreciation, and amortization (EBITDA) is protected against inflation. This makes it an appealing choice for long-term investors.
One significant advantage Enbridge holds is its recent settlement over its Mainline contracts, positioning the company ahead of the Trans Mountain expansion. This settlement lowers tariffs, maintains a monthly common carrier system, and extends terms to the end of 2028. This security and predictability have attracted many investors.
Furthermore, Enbridge’s management has been consistently trimming estimates of the competing pipeline’s impact, leading to record Mainline volumes and new investments in infrastructure. This growth, combined with Enbridge’s diversified businesses, including gas transmission, a substantial utility presence in Ontario, and a renewables segment, supports a 5% annual growth profile.
The cancellation of the Keystone XL pipeline positions Enbridge to capture new organic pipeline expansions to meet the unmet demand from producers. However, Enbridge faces ongoing legal and stakeholder challenges related to environmental, social, and governance (ESG) issues across its assets. The company’s reliance on transporting oil from the Canadian oil sands, known for being environmentally unfriendly, raises sustainability concerns. Enbridge’s efforts in the renewables business are yet to establish a strong presence, potentially risking capital investments in this sector.
Fortis: A utility powerhouse
Fortis stock, however, primarily focuses on regulated electric and gas utilities and independent transmission assets in North America, with a significant presence in the United States. The company’s prized asset, ITC Holdings, offers a unique opportunity for Fortis to benefit from the aging infrastructure and the growth of renewable energy in the United States. ITC’s returns on equity are higher than state-allowed rates, and forward-looking ratemaking helps reduce regulatory lag.
Furthermore, Fortis has made strategic acquisitions, such as UNS Energy in Arizona, which provides faster growth opportunities due to population expansion and a transition to cleaner energy sources. This diversification across various regulatory environments and stable Canadian operations results in consistent earnings and supports dividend growth.
Fortis operates a stable business profile with regulated operations, making it an excellent choice for consistent earnings and dividend growth. The company’s capital expenditure plan is expected to drive 6% annual earnings growth through 2027, offering an attractive income outlook. It’s also now a Dividend King, offering 50 consecutive years of dividend increases!
However, the Canadian regulatory environment provides lower returns compared to the U.S., potentially limiting the company’s profitability. Past acquisitions and diversification efforts may carry a risk of overpaying for assets, although the company has recently shifted its focus towards internal growth opportunities. Rising interest rates could increase financing costs, potentially making Fortis’s dividend less attractive to income investors.
So, which is it?
Both Enbridge stock and Fortis stock offer unique investment opportunities for passive-income seekers. Enbridge’s focus on energy infrastructure and stable dividend, along with its efforts in renewable energy, make it a compelling option. However, Fortis’s diversified utility operations and commitment to internal growth opportunities provide a solid foundation for consistent returns.
However, given that Enbridge stock has actually dropped in share price rather than climbing in recent years, along with its poor renewables expansion, makes it a less appealing option. Therefore, I would choose Fortis stock above Enbridge today.
